...21 1 2 3 4 5 Chapter Twenty-One Analyzing Financial Statements After completing this chapter, you should be able to: Explain the objectives of financial statement analysis. Describe and use the following four analytical techniques: horizontal analysis, trend analysis, vertical analysis, and ratio analysis. Explain the importance of comparisons and trends in financial statement analysis. Prepare and interpret common-size financial statements. Define and compute the various financial ratios discussed in the chapter. CONTEMPORARY INTERIORS TO GO NATIONAL Chicago, IL—Contemporary Interiors, a Chicago tradition in Scandinavian furniture and contemporary design, has announced a decision to go national. Although Contemporary Interiors has opened stores throughout the Midwest in recent years, the company has remained a regional business with the bulk of its sales in the greater Chicago area. Yesterday, however, a company spokesman announced that Contemporary Interiors’ Board of Directors had decided the time was right to make the next move. Marc Janson, spokesman for the firm’s president and CEO, pointed to the strong economy and consumer confidence as being key to the decision. “Disposable income is up, and we’re seeing that in our business,” said Janson. “Even more important, though, is our company’s strong financial position. The analysts tell us that our financial statements look good. Our working capital, inventory turnover, return on assets, and so forth are all strong. This...
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...Analyzing Financial Statements Rebecca Hunter HSM/260 January, 29, 2012 Jan Bridgeford-Smith Analyzing Financial Statements Ratios | 2002 | 2003 | 2004 | Current ratio | 104,296/139,017=0.75 | 82,058/93,975=0.87 | 302,902/337,033=0.89 | Long-term solvency ratio | 391,270/310,246=1.26 | 359,863/259,979=1.38 | 699,004/338,937=2.06 | Contribution ratio | 617,169/1,165,065=0.5 | 632,889/1244261=0.51 | 1,078,837/2,191,243=0.49 | Program/Expense ratio | 834008.20/ 1,185,008=0.58 | 795,579.77/1,316,681=0.60 | 1,376,311.72/1,972,131=0.70 | General/Mgmt. ratio | 351,000/1,185,008=0.29 | 371,101/1,316,681=0.28 | 445,819/1,972,131=0.23 | Revenue/Expense ratio | 1,165,065.00/1,185,008.00=0.98 | 1,244,261/1,316,681=0.94 | 2,191,243/1,972,131=1.11 | Fixed cost | 150,000+24,000=174,000 | 150,000+24,000=174,000 | 150,000+24,000=174,000 | Variable cost | 417,004+125,101.20+117,903+351,000=1,011,008.20 | 520,069+171,622.77+79,888+371,101=1,142,680.77 | 915,787.20+320,525.52+115,999+445,819=1,798,130.72 | Break Even point | | | | Using the RATIOS, write an evaluation of the organization’s financial picture over the 3-year period specified in Appendix D. Be sure to indicate which ratios support your conclusions. The picture that I get from the ratios is that the company is that all the ratio’s go up over the years except the general management which went down, the revenue expense ratio going up is good it means that the company has more coming in...
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...105.00 Formula for the Break-even point PX=A + BX P= Total agency revenue divided by total number of customers $1,165,065/5,962=$195.42 income per customer X= break-even point A=$642,903.00 B= Total variable cost divided by the total number of customers $542,105/5,962=$90.93 variable cost per client 195.42x=642,903 + 90.93x 104.49x=642,903 X=6,152.77 or 6,153 clients Analyzing Financial Statements Year 2003 Fixed Costs=Rent and Utilities + Telephone + Management + Other $150,000+24,000.00+371,101.00+79,888.00=$545,101.00 Variable Costs= Payroll and Benefits + Supplies $520,069.00+ 171,622.77=$691,691.77 or $691,692.00 Formula for the Break-even point PX=A + BX P= Total agency revenue divided by total number of customers $1,244,261.00/6821=$182.42 income per customer X= break-even point A=$545,101.00 B= Total variable cost divided by the total number of customers $691,692.00/6821=$101.41 variable cost per client 182.42x=545,101.00 + 101.41x 81.01x=545,101.00 X=6,152.77 or 6,728.81 or 6,729 clients Analyzing Financial Statements Year 2004 Fixed Costs=Rent and Utilities + Telephone + Management + Other $150,000+24,000.00+445,819.00+115,999.00=$735,818.00 Variable Costs= Payroll and Benefits + Supplies $915,787.20+ 320,525.52=$1,236,312.72 or $1,236,313.00 Formula for the Break-even point PX=A + BX P= Total agency revenue divided by total number of customers $2,191,243.00/11822=$185.35 income per customer X= break-even...
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...Mod 4-Gain Insights By Analyzing the Financial Statement This report is aimed at providing the financial analysis for Huntsman Corporation (Ticker symbol: HUN) through analyzing a series of key financial ratios including, but not limit to: ROE, RNOA, NOPM, NOAT, etc. in order to demonstrate the performance of Huntsman in a particular fiscal year (year ended Dec.2011). Please be advised that the Balance Sheet, Income Statement (here Huntsman addressed as “Consolidated Statement of Operation and Comprehensive (Loss) Income”) and the Statement of Cash Flow will also be enclosed in this report as appendixes for your reference. I will be first summarizing all the key financial indicators, which will be utilized to analyze and support this report, and have got them showed in the following table as you can see below: (NOTE: since the company itself didn’t specify, I will assume that the federal and state statutory tax rate is 38.5% for the calculation of NOPAT) (1) From the summarized form above, we can conclude that the current ration of Huntsman is: 8657/6881=1.25>1, which means a positive working capital, implying that Huntsman’s cash generated by “liquidating” current assets would be sufficient to pay liabilities. (2) The liabilities-to-equity ratio is: 6881/1776=3.87. From this index, we can actually see that Huntsman’s liabilities are almost 4 times the number of equity, and it’s much greater than the average index, 1, for publicly traded companies, indicating...
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...Analyzing Financial Statements HSM/260 Analyzing Financial Statements Calculating Ratios Current Ratio: 2003 Current ratio= Current assets Current liabilities Current ratio = 82,058.00 93,975.00 Current ratio = 0.87 Long-term solvency ratio: Long-term solvency ratio = Total assets Total liabilities Long-term solvency ratio = 359,863.00 259,979.00 Long-term solvency ratio = 1.38 Contribution ratio: Contribution ratio = Largest revenue source Total revenues Contribution ratio = 632,889.00 1,244,261.00 Contribution ratio = 0.51 Programs/expense ratio: Programs/expense ratio = Total program expenses Total expenses Programs/expense ratio = 945,579.77 1,316,681.00 Programs/expense ratio = 0.72 General and management/Expense ratio: Total general and management expenses General and management/Expense ratio = Total expenses General and management/Expense ratio = 371,101 1,316,681.00 General and management/Expense ratio = 0.28 Fund-raising/Expense ratio: Fund-raising/Expense ratio = Total fund-raising expenses Total expenses Fund-raising/Expense ratio =...
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...“SAC’s Performance Analysis for 2010 and 2011” To: Dakota Cole Chief Executive Financial Officer (CEFO) From: Business Financial Analyst Date: Re: SAC’s Performance Analysis for 2010 & 2011 Message: As part of our efforts to ensure that we get closer and closer to our main objective of expanding our operations, I have performed a Performance Analysis for both the 2010 and 2011 fiscal periods (Colorado Technical University Online, 2012). The Managerial Accounting information collected helps the internal users to use strategic planning, and operate efficiently while evaluating the performance of all areas within the company (Atkinson, Kaplan, Matsumura, & Young, 2012). This allows them to have a better handle on the operations. Thus, allowing for a more informed decision making process (Atkinson, Kaplan, Matsumura, & Young, 2012). Previously, the managerial accounting financial information was just expressed in monetary denomination (Accounting for Management, 2012). Now it has led to include any information that is considered valuable operational or physical information (Colorado Technical University Online, 2012). The performance of a new product, and how well-trained an employee is or how satisfied a customer are all good examples of the nonfinancial information needed to make better decisions (Colorado Technical University Online, 2012). The amounts of processing...
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...Module 4: Critical Thinking View Grade InfoGrade: N/A Classified Balance Sheets (60 points) The following (given in scrambled order) are accounts and balances from the accounting records of Alleg, Inc., as of December 31, 2012, after the books were closed for the year. Common stock, authorized 21,000 share At $1 par value, issued 12,000 shares $12,000 Additional paid-in capital 38,000 Cash 14,000 Marketable securities 17,000 Accounts receivable 26,000 Accounts Payable 16,000 Current maturities of long-term debt 11,000 Mortgages payable 80,000 Bonds payable 65,000 Inventory 33,000 Land and buildings 57,000 Machinery and equipment 120,000 Goodwill 13,000 Patents 9,000 Other assets 45,000 Deferred income taxes (long-term liability) 18,000 Retained earnings 33,000 Accumulated depreciation 61,000 Bonds and mortgages generally have 10-30 years until maturity. Marketable securities are short-term investments that can be converted to cash in a matter of minutes. Required: Prepare a classified balance sheet with a proper heading on a spreadsheet. For assets, use the classifications of current assets, plant and equipment, intangibles, and other assets. For liabilities, use the classifications of current liabilities and long-term liabilities. Compute the total asset turnover rate assuming that total revenues in 2012 were $682,500. Round to the nearest hundredth, e.g. 3.33. Assume that Alleg’s primary competitor...
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...Analyzing Financial Statements Kristina M Spencer HSM260 May 29, 2011 Erin Akins Analyzing Financial Statements Current Ratio 2002 Current Ratio = Current Assets/Current Liabilities 1,165065.00/1185008.00 = 0.983 2003 Current Ratio = Current Assets/Current Liabilities 1,244,261.00/1,316,101.00 = 0.945 2004 Current Ratio = Current Assets/ Current Liabilities 2,191,243.00/1,972,131.00 = 1.111 Long Term Solvency 2002 Long Term Solvency = Total Liabilities/Total Assets 1185008.00/1165065.00 = 1.017 2003 Long Term Solvency = Total Liabilities/ Total Assets 1316681.00/1244261.00 = 1.058 2004 Long Term Solvency = Total Liabilities/ Total Assets 1972131.00/2191243.00 = 0.900 Contribution Ratio 2002 Contribution Ratio = (Contribution Margin/Sales) 100 (506788.00/617169.00)100 = 82.11 2003 Contribution Ratio = (Contribution Margin/Sales) 100 (579824.00/632889.00)100 = 91.61 2004 Contribution Ratio = (Contribution Margin/ Sales) 100 (1004874.00/1078837.00)100= 93.14 Programs and Expense Ratio 2002 Programs and expense Ratio = (Total Expense/Customers) 100 (1185008.00/5962)100 = 19876.01 2003 Programs and expense Ratio = (Total Expense/Customers) 100 (1316681.00/6821)100 = 19303.34 2004 Programs and expense Ratio = (Total Expense/Customers) 100 (1972131.00/11822)100 = 16681.87 General and Management and Expense ratio 2002 General and Management and Expense ratio = (Other + Management/ Customers) 100 (468903.00/5962)100...
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...Module 4 Analyzing and Interpreting Financial Statements QUESTIONS Q4-1. Return on investment measures profitability in relation to the amount of investment that has been made in the business. A company can always increase dollar profit by increasing the amount of investment (assuming it is a profitable investment). So, dollar profits are not necessarily a meaningful way to look at financial performance. Using return on investment in our analysis, whether as investors or business managers, requires us to focus not only on the income statement, but also on the balance sheet. Q4-2.B ROE is the sum of an operating return (RNOA) and a nonoperating return (the effective use of financial leverage – specifically, leverage multiplied by the spread). Increasing leverage increases ROE as long as the spread is positive. Financial leverage is also related to risk: the risk of potential bankruptcy and the risk of increased variability of profits. Companies must, therefore, balance the positive effects of financial leverage against their potential negative consequences. It is for this reason that we do not witness companies entirely financed with debt. Q4-3. Gross profit margins can decline because 1) the industry has become more competitive, and/or the firm’s products have lost their competitive advantage so that the company has had to reduce prices or is selling fewer units or 2) product costs have increased, or 3) the sales mix has changed from higher margin/slowly turning...
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...Analyzing the Four Financial Statements N'Gia K. Conyers ACC 561 October 8th, 2012 Charles Royes Jr. Analyzing the Four Financial Statements In the study of accounting there are four different types of financial statements. These financial statements have an important role in the daily functions of many businesses and corporations. Accounting is defined as “the information system that identifies, records, and communicates the economic events of an organization to interested users” (John Wiley & Sons, 2012). The financial statements when working with finances include Balance Sheet, Income Statement, the statement of cash flows, and the statement of owner’s equity. This paper will explain the four financial statements, along with which statement is a best fit to creditors, investors, and management. The financial statement that would be of interest to creditors is the balance sheet. The balance sheet presents outlined information in relation to an organization’s assets, liabilities, and shareholder’s equity. The balance sheet statement also shows the financial position for a specific company at any given time. Under assets are two different sections, current asset, and fixed asset. The income statement provides the details that show the profits and losses over a period, such as one month, three months, and up to one year. The income statement is prepared at the end of the accounting period. In addition, the income statement identifies the amount of net income...
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...accounting periods. There are several sequences includes in the accounting cycle such as identifying, collecting and analyzing documents and business transactions, records the process in journals, posting the journalized amounts to ledger, preparing the trial balances and financial statements. Usually, an accounting cycle of the company begins when a business transaction take place and finishes the accounting cycle when the financial statements are prepared. The period of the accounting...
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...Home Depot Financial Statements Home Depot a hardware box chain store throughout the United States has released their 2007, 2008, and 2009 annual reports. Within Home Depots, annual reports, are financial statements that will assist in analyzing the financial standings of Home Depot from 2007 to 2009. Taking a more in-depth look at the financials statements below, which includes consolidated statements of earning, balance sheet, and cash flow helps better to understand the internal and external use of each statement. As well as analyzing how a company makes decisions based on the financial information on the statements. Consolidated Statements of Earnings Home Depot's income statement is a mirror of their expenditures versus income that will tell if Home Depot is making a profit or in a financial bind. Within the consolidated statements, are net sales that are a tool to deceiver what the company’s cost of goods are and expenses that are a percentage of the net sales. After analyzing the three principal components cost of goods, expenses, and net sales a company can make financials decisions. These decision includes whether to increase or decrease costs or cost of goods based on the companies income for a said period or at the end of the fiscal year. For example, if Home Depot were to make some cuts due to down sales then analyzing cost of goods could help to make up for low sales. A company may pull merchandise from their warehouse or only order essential items to...
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...FINANCIAL ANALYTICAL TOOLS Financial analysis involves evaluating the current financial statements of an organization in order to access the current profitability and also compare same with past performance (time series analysis) and the performance of other players within the industry. In other words, analyzing the financial statements assesses the financial health of a company. The major statistical tools used in financial analysis are ; • Ratio Analysis • Cash Flow Analysis • Common Size Analysis Ratio Analysis Investopedia describes ratio analysis as , ‘A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements’. Ratio Analysis can be viewed along the following lines; • Liquidity Ratios • Profitability ratios • Debt ratios • Operating performance ratios • Cash flow indicator ratios • Investment Valuation ratios In reviewing the liquidity ratios, the current ratio, also known as working capital ratio, is used to calculate the proportion of current assets that is available to cover current liabilities, the formula can be calculated as Current Ratio = Current Assets Current Liabilities Its limitation however rests in the fact that in assessing liquidity, it assumes all the company’s assets will be liquidated to cover this and no indication has been given to the amount of time required to liquidate these current considering an organization is a going concern and as such the key to liquidity...
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...17, 2014 ABSTRACT Week 4 brought on the discussions of analyzing financial statements. We looked at how to use the indirect and direct methods when putting together a statement of cash flows. It was also discussed how one would use ratios and vertical and horizontal analysis in regards to deciphering financial statements. Lastly, we talked about preferred and common stocks are issued, placed as journal entries on financial statements and the paid out in dividends. With these topics we got to see why financial statements are compiled the way they are and it gave us a better understanding of how they work for a company. Each week the understanding is getting greater on financial statements. Financial statements are analyzed by corporations so that they are able to see and identify their strengths and possible weaknesses. Identifying the relationship with the balance sheet and a company’s profit and loss accounting will help in the decision making process on whether to proceed with certain things or to either change or eliminate them all together. External users of a company look at the information on financial statements to decide whether or not they want to invest or issue credit but the company also uses these statements to help make the hard decisions that management needs to build a company with staying power. Through issue of common and preferred stocks we must pace the journal entries on our statements and then we use that information when we are paying out dividends...
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...The Four Types of Financial Statements Aaron Ellyson University of Phoenix The Four Types of Financial Statements In today’s business environment an employee’s ability to read, follow, and interpret financial statements is an integral part in ensuring a business is properly positioned to succeed and operate profitably. Understanding what the numbers represent, how business decisions influence those numbers, and what categories comprise the data shown on these statements will enable employees to help drive their companies with cost conscience motives and personal responsibility for their actions. The four basic financial statements are as follows: income statements, retained earnings statements, balance sheets, and statements of cash flow. These reports allow the user to get an in depth analysis of how mindful a business’s employees are with decisions and the direction of how successful or unsuccessful a company will be. An income statement provides insight into the successes and areas of opportunity a business has over a specified period. This report provides a breakdown of the earnings and expenses related to the business’s operations during that period. Any expenses incurred during this period are deducted from the revenues and net gains or losses are totaled. Retained earnings statements are interrelated to an income statement because they cover the same specified period. The information covered in this report provides an explanation of what earnings have been generated...
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